Group Service or Individual Service? Differentiated Pricing for a Private or Public Service Provider

28 Pages Posted: 31 Jan 2024

See all articles by Wenhui Zhou

Wenhui Zhou

South China University of Technology

Yanhong Gan

South China University of Technology - School of Business Administration (SBA)

Weixiang Huang

South China University of Technology

Pengfei Guo

City University of Hong Kong

Date Written: January 31, 2024

Abstract

Facilitated by information technology and online platforms, group service has emerged in many service systems, such as one-to-many tour guide service, one-to-many tutoring courses and one-to-many medical diagnosis. We consider a service provider offering both group service and individual service and model it as a single-server queue in which customers with heterogeneous waiting costs make both joining/balking and group/individual service decisions. We analyze and compare the equilibrium differentiated pricing strategies and customer equilibrium behavior under profit maximization (system C) and social welfare maximization (system S). We find that (i) the socially optimal price is lower than the profit-maximizing price and, correspondingly, a larger total number of customers is served under system S than under system C; (ii) it is more likely for system S to provide group service and to achieve full market coverage than system C; (iii) both equilibrium service volume and service price are nonmonotonic functions of the potential arrival rate, which is contrary to classical theory due to the follow-the-crowd (FTC) characteristic of the group service; (iv) compared with the scenario where only individual service is provided, providing both services can achieve a win-win result for the firm and customers and the value of group service is most significant when the potential arrival rate is moderate; (v) through numerical studies, we observe that there exists an optimal group size under both systems.

Keywords: Market segmentation; differentiated service pricing; queueing economics; equilibrium analysis

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JEL Classification: C72

Suggested Citation

Zhou, Wenhui and Gan, Yanhong and Huang, Weixiang and Guo, Pengfei, Group Service or Individual Service? Differentiated Pricing for a Private or Public Service Provider (January 31, 2024). Available at SSRN: https://ssrn.com/abstract=4711067 or http://dx.doi.org/10.2139/ssrn.4711067

Wenhui Zhou

South China University of Technology ( email )

Wushan
Guangzhou, AR Guangdong 510640
China

Yanhong Gan

South China University of Technology - School of Business Administration (SBA) ( email )

Wushan
Guangzhou
China

Weixiang Huang (Contact Author)

South China University of Technology ( email )

Pengfei Guo

City University of Hong Kong ( email )

Hong Kong

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